St. Louis Fed research says central banks should not be in cryptocurrency business

May 11, 2018Anna Reitman

The distinguishing characteristic of cryptocurrencies is the decentralized nature of transaction handling, which enables users to remain anonymous and allows for permissionless access. These key characteristics are a red flag for central banks, and researchers from the St. Louis Fed predict that no reputable central bank would issue a decentralized virtual currency where users can remain anonymous. The reputational risk would simply be too high. Rather, central banks could issue central bank electronic money. This money would be tightly controlled by them, and users would be subject to standard KYC (“know your customer”) and AML (“anti-money laundering”) procedures.

Some central banks supposedly are evaluating the issuance of a central bank cryptocurrency. However, a closer look at these projects reveals that these are not cryptocurrencies according to the research definition. The projects usually are highly centralized.

In general, researchers don’t think that a central bank should be in the business to satisfy the demand for anonymous payments. They believe that such a demand can and will be perfectly satisfied by the private sector, in particular through cryptocurrencies. History and current political reality show that, on the one hand, governments can be bad actors and, on the other hand, some citizens can be bad actors. The former justifies an anonymous currency to protect citizens from bad governments, while the later calls for transparency of all payments. The reality is in between, and for that reason researchers welcome anonymous cryptocurrencies but also disagree with the view that the government should provide one.